Every day, it seems like another wealth manager joins the scramble for Asia’s growing ranks of millionaires, especially those from China. With cash streaming in, there hasn’t been much reason for private banks to worry about high costs for things like salaries, technology and compliance.
But as emerging markets turn south, it’ll become more difficult to paper over these structural problems. Lower returns, and even outflows, will force a day of reckoning for some of the industry’s smaller players.
In recent years, Hong Kong has become an IPO billionaire factory for tech entrepreneurs, hotpot restaurateurs and everything in between. That’s added to the huge pile of Chinese money already parked there. The city’s wealth managers will be handling $2 trillion in five years, double the present level, predicts Hong Kong’s Private Wealth Management Association in a report published with KPMG China.
Hong Kong and Singapore could even beat Switzerland as the world’s top banking destination for the rich in the next few years, say Bloomberg Intelligence analysts Diksha Gera and Sharnie Wong. Wealth in these Asian financial hubs has grown about 10 percent a year in the last three years, beating the Swiss growth rate of 3 percent.
The gush of money has inspired a competitive streak among banks operating in the region. Those piling in include HSBC Holdings Plc; Deutsche Bank AG; LGT Group, which bought out ABN Amro Group NV’s Asian private banking business; and Singapore’s banks like DBS Group Holdings Ltd. and Bank of China’s overseas arm, BOC Hong Kong Holdings Ltd. They’re battling with smaller Swiss private banks, fintech firms and even robo-advisers and small asset managers to topple old-guard giants UBS Group AG and Credit Suisse Group AG for a chunk of the region’s wealth.
That’s all well and good. However if the current market downturn persists, it’ll eventually show up in banks’ bottom lines, especially as a lot of wealth managers’ costs are fixed.
First, private bankers don’t come cheap: Those that jump to a new firm can land a raise of 30 percent or more. These “relationship managers” tend to come from competitors or used to be commercial or investment bankers — not exactly a low-paid lot. Headcount costs at Asia’s big banks are up 7 percent to 8 percent this year, on pace with 2017, when emerging-markets were booming, says Pathik Gupta, who heads the Asia office of consultancy Scorpio Partnership.
Banks also have a lot of compliance costs, as regulators crack down on tax evasion and money laundering. Many have shelled out billions on multiyear compliance programs that have added extra layers of scrutiny. Two years ago, opening an account for a first-time client took an average of 30 days in Hong Kong; now it takes 40, according to the PWMA survey.
Then consider clients’ technology demands. Young entrepreneurs and rich millennial children running their family money pots expect flashy apps and sleek chat services. That’s pressured banks to ramp up spending on tech to court their clients’ tastes and meet compliance requirements: Such costs among the bigger players are up 15 percent this year, says Scorpio’s Gupta.
A prolonged rout also would be especially painful for Asia’s young entrepreneurs and newly rich, who tend to have a higher risk appetite and want to grow, rather than preserve, their wealth. As a result, they’ve piled into emerging markets, often with leveraged money.
So far, the big fish are doing fine. Revenue at the top 25 private banks in Asia rose by double digits last year, says Scorpio’s Gupta. And those smaller banks with strong niches — a Canadian player, for instance, could be popular among Chinese with assets there — might be able to weather the storm. But wealth management is a scale business. Firms like UBS can spread their costs globally, while a small boutique will have a harder time doing so.
That’s why smaller players could start to retreat. Australia & New Zealand Banking Group Ltd., Coutts International, Societe Generale SA, Barclays Plcand ABN Amro Group NV have already rushed to the exits in Asian wealth management over the last three years.
In 2008, at the dawn of the financial crisis, wealth managers saw their assets under management fall around 20 percent, according to a study by Oliver Wyman with Deutsche Bank. If another slump forces private banks to post slower growth and curtail hiring, this Asian millionaire gold rush could turn ugly.